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In the article: STUDIO SHAME! Even Harry Potter Pic Loses Money Because Of Warner Bros' Phony Baloney Net Profit Accounting by Mike Fleming, the latest leaked report shows that even though the Harry Potter movie grossed almost $1 billion dollars in sales, it still has not made a penny in profit. How is this possible? How do they do it? You may even ask this question of many of the companies on the public markets today.
Well, it's not that hard, anyone can put together numbers and manipulate financial reports to look the way they want them to.
In the article, it discusses how for the Harry Potter movies it's a matter of the method of accounting they have chosen to use. They calculate it on a net profit basis. This means the amount that is left over from revenues earned after the expenses related to the project are deducted. So what they are doing is recording additional expenses such as studio distribution fees and interest paid for financing the movie. However the question is to whom the distribution fees and interest were paid. In many cases, these fees and interest are paid to affiliated companies in order to take the profit out and leave the movie unprofitable so that they do not need to pay out extra fees to net participants. "It's an illusion to make writers, and lower-level actors and filmmakers feel they have a stake in the game."
Could this be happening to you? Is your bookkeeper manipulating your records? This is how fraud could be happening to you in your own small business. It's how people get away with fraud for years with the owners of the company never knowing it is happening. How does this happen in your own small business?
In many cases, it's the result of 2 issues; the owners not being present and not having proper internal controls in the company. Many small business owners are focused on the other areas of the company and do not understand the 'numbers'. Thus they are not active in the bookkeeping and financial reporting aspects of their companies. The easiest solution for them is to hire someone else they trust to handle this side of the business. However, the down side is that they tend to turn a blind eye to the bookkeeping and financial reporting and give away all control of the finances to someone else. In many cases, even the signing authority on their bank accounts. They allow other people to sign the cheques for their business and have full unrestricted access to the assets of the company. This is a huge mistake that can cost you everything.
If you are currently doing this, stop it immediately. If you own the business 100% by yourself, make sure that you are the only signing authority at the bank. If this is a huge issue for you or you have business partners, at a minimum ensure that your bank requires two signatures on every cheque issued. This way no one person can take the funds out of the company. Also ensure that there is no access to direct cash withdrawls or electronic funds transfers. As a small business owner, you must always have control over the money. Even Oprah Winfrey has stated on live TV that she signs every single cheque that is written for her business.
The second issue is that there are not sufficient internal controls in the business. Internal controls means the process designed to ensure that the assets of the company are safeguarded against theft and unauthorized use. This will ensure reliable financial reporting, effective / efficient operations and compliance with applicable laws and regulations.
The biggest internal control mistake is a lack of segregation of duties. This means that there is not enough separation between the recording of the transactions and the access to the assets of the company (these being cash, product, property or equipment).
If the same person is recording all of the company's activities in the accounting records like the sales and the purchases and then collecting the money or paying the bills it is very easy for them to take money and hid the missing money by recording phony transactions. For example, if someone took cash from the company they could easily reverse sales to cover up the missing money. They could do the same with writing a cheque by making the cheque out in their name and then recording it as an expense for the company. If you as the business owner are not actively involved in the accounting and finance for the company how would you even know that this has occurred.
Well, it's not that hard, anyone can put together numbers and manipulate financial reports to look the way they want them to.
In the article, it discusses how for the Harry Potter movies it's a matter of the method of accounting they have chosen to use. They calculate it on a net profit basis. This means the amount that is left over from revenues earned after the expenses related to the project are deducted. So what they are doing is recording additional expenses such as studio distribution fees and interest paid for financing the movie. However the question is to whom the distribution fees and interest were paid. In many cases, these fees and interest are paid to affiliated companies in order to take the profit out and leave the movie unprofitable so that they do not need to pay out extra fees to net participants. "It's an illusion to make writers, and lower-level actors and filmmakers feel they have a stake in the game."
Could this be happening to you? Is your bookkeeper manipulating your records? This is how fraud could be happening to you in your own small business. It's how people get away with fraud for years with the owners of the company never knowing it is happening. How does this happen in your own small business?
In many cases, it's the result of 2 issues; the owners not being present and not having proper internal controls in the company. Many small business owners are focused on the other areas of the company and do not understand the 'numbers'. Thus they are not active in the bookkeeping and financial reporting aspects of their companies. The easiest solution for them is to hire someone else they trust to handle this side of the business. However, the down side is that they tend to turn a blind eye to the bookkeeping and financial reporting and give away all control of the finances to someone else. In many cases, even the signing authority on their bank accounts. They allow other people to sign the cheques for their business and have full unrestricted access to the assets of the company. This is a huge mistake that can cost you everything.
If you are currently doing this, stop it immediately. If you own the business 100% by yourself, make sure that you are the only signing authority at the bank. If this is a huge issue for you or you have business partners, at a minimum ensure that your bank requires two signatures on every cheque issued. This way no one person can take the funds out of the company. Also ensure that there is no access to direct cash withdrawls or electronic funds transfers. As a small business owner, you must always have control over the money. Even Oprah Winfrey has stated on live TV that she signs every single cheque that is written for her business.
The second issue is that there are not sufficient internal controls in the business. Internal controls means the process designed to ensure that the assets of the company are safeguarded against theft and unauthorized use. This will ensure reliable financial reporting, effective / efficient operations and compliance with applicable laws and regulations.
The biggest internal control mistake is a lack of segregation of duties. This means that there is not enough separation between the recording of the transactions and the access to the assets of the company (these being cash, product, property or equipment).
If the same person is recording all of the company's activities in the accounting records like the sales and the purchases and then collecting the money or paying the bills it is very easy for them to take money and hid the missing money by recording phony transactions. For example, if someone took cash from the company they could easily reverse sales to cover up the missing money. They could do the same with writing a cheque by making the cheque out in their name and then recording it as an expense for the company. If you as the business owner are not actively involved in the accounting and finance for the company how would you even know that this has occurred.
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